In an age of uncertainty within healthcare, it is essential that hospitals and health systems minimize real estate operating costs, also known as total occupancy costs. With real estate consistently being the second or third largest expense on the balance sheet, the focus on cost-reduction is nothing new. In the last decade, internal hospital real estate teams have successfully implemented new strategies resulting in modest cost reduction benefits. However, the transformational value they hoped to attain is often not realized due to several factors including:

Lack of a proven roadmap for executing in a complex healthcare environment

The Guiding Principles: What, Why and When

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Ensure real estate control over space supply - Set standards, approach and frequency of revision for how the end user occupies space

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Policies were put in place to make real estate the final decision maker for leases. This limited the possibility of an end user signing a suboptimal lease. CBRE also established a recurring review process with regional leadership to evaluate space usage within their region. CBRE process playbooks helped the client understand the necessary steps.

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To begin our client portfolio analysis, we established “gearing ratios” that determined a total amount of clinic square footage a physician should occupy. If a physician, or team of physicians, leased an amount of square footage that exceeded the amount defined by the gearing ratio, the space was marked as potentially being underutilized.

2

Evaluate opportunities to add tools and improve planning process

The client felt the evaluation process was greatly improved using CBRE’s proprietary tool, Portfolio Optimizer powered by Tableau. By visualizing the portfolio on a map overlay, we could identify underutilized spaces that were near other underutilized spaces or owned properties, presenting consolidation opportunities. We could also visualize leases by expiration or option date, addressing the most actionable opportunities first.

3

Ensure planning is proactive –The internal real estate division, and the end users agree on a strategic direction for all leased or unoccupied owned space

CBRE outlined an approach to address underutilized space targets. After developing a list of targets and potential actions for each, meetings were established with appropriate decision-makers. For this healthcare system, it was the Hospital Finance Officer (HFO) and regional clinical managers. These influential leaders had knowledge of the spaces under evaluation, as well as the power to initiate action on each lease. Each opportunity was presented via CBRE’s Portfolio Optimizer tool. Based on leadership’s knowledge of the spaces, unfeasible opportunities were removed and others not previously identified were added.

By the end of these meetings, the list contained nearly 100 opportunities to pursue, sorted by priority and termination date.

Regional leaders may present myriad reasons that a portfolio optimization action may not work, from difficult landlords to hesitant physicians. However, it is important to engage in conversations with the end users as they can reveal deeper insights about opportunities or unveil new, better strategies. Leaders may also not be aware that opportunities exist to start new leases within owned properties rather than in third-party properties.

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Plan granularly with a global mindset – Individual lease decisions are made within context of the plan, after being vetted for reduction opportunity

Make sure real estate action plans as well as portfolio optimization plans match the long-term goals of the system. Don’t work in silos.

6

Protect the System’s Best Interests

The right decision isn’t always the easiest or most popular. When necessary, involve health system leadership to drive actions that will have significant positive impacts on the system’s portfolio.

In ConclusionPortfolio Optimization is not for the faint-hearted. It requires a phased, strategic approach utilizing proven processes and experts who have previously achieved such success in a healthcare environment. We know our clients know their healthcare organization better than us, or anyone else for that matter. But often, it is this intimate knowledge that gets in the way of delivering deeper cost savings through which new healthcare delivery opportunities could be realized.

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About the Authors

Angel Benschneider is the CBRE Alliance Director for one of the largest non-profit healthcare systems in the US. She has an MBA from the University of Texas and a Masters of Science Degree in Healthcare Management from the University of Texas at Dallas. Prior to CBRE, Mrs. Benschneider served as a Senior Vice President with Caddis Partners - a development company specializing in healthcare real estate development, operations, and leasing. Mrs. Benschneider has been in real estate for over 20 years with experience spanning property management, development, and leasing.

Seth Ramey is the Account Strategist for one of the largest non-profit healthcare systems in the US. He previously served as a member of CBRE Labs, CBRE’s Global Corporate Innovation Team. Seth has led a variety of strategic initiatives within CBRE including strategic portfolio planning, rapid technology development, business analytics, data strategy, process improvement, and new business pursuits. He is currently completing a Professional MBA from the University of Texas.